Redefining Your Sales Comp Plan
Updated: Jan 24, 2020
By Jim Kahrs
When we survey businesses to find out what they need the answer most often relates to finding, hiring and retaining sales reps. Spending 32 years in the business systems industry has given me the opportunity to see almost every sales compensation plan possible. I’ve seen plans that favor the dealer, I’ve seen plans that favor the sales rep and I’ve seen plans that truly work to the mutual benefit of both.
So, what makes a good compensation plan? One of the major precepts of the Hubbard® Management System states that when you reward production you get production. When considering a compensation plan you first have to decide what “production” you’re looking to increase. Compensation plans can drive sales reps to increase total sales revenue, gross profit from sales, number of units sold, etc. They can also make reps favor one category over the others
Components of Your Sales Compensation Plan
A sales compensation plan can have a number of different components. Typically they start with a salary. Unfortunately, the days of starting a new rep on a commission only plan are gone. During the interview process many reps will ask what the salary is. My advice here is to keep the salary as low as possible while not hurting your recruiting efforts. Depending on your market and the make up of the rest of your compensation plan salary should probably range from $25,000 to $35,000. Because salary is the guaranteed portion of the comp plan it often does not drive production as it acts as a reward even when there is little or no sales production. However, you can turn salary into a reward based system. We have helped businesses set up sales activity systems that quantify sales rep’s activities like prospecting calls, appointments, demos, etc. Each activity is assigned a point value and reps are required to accrue 50 points a day. When this system is in place sales rep salaries can be adjusted based on their points. For example, if a sales rep only reaches 80% of his/her point quota for the month of January he/she would only get 80% of his/her salary in February. Of course you need to make sure that this type of plan is legal in your state.
The next component of many comp plans is a draw. When looking up the word “draw” in Webster’s New World Dictionary I was surprised to see that there are 62 definitions listed. No wonder there tends to be confusion around this term. For the purpose of compensation plans a draw is an advance against future commissions or bonuses. Paying a draw allows the sales rep to receive income with each pay check when commissions and bonuses are paid monthly or quarterly. There are two types of draw. The first is a recoverable draw, meaning that all draw dollars paid to the rep must be paid back to the dealership from the next commission run. If the rep doesn’t earn enough commission to cover the draw a negative balance is carried forward to the next period. When you have a recoverable draw in place it is important to have a maximum allowable negative balance.
I would recommend setting that number between $3,000 and $5,000. Once the maximum negative balance is reached the rep would no longer get a draw until they’ve paid off a certain amount of the back dollars owed. Having this maximum negative balance in place has saved many business systems dealers thousands of dollars and helped them identify sales reps that weren’t going to last much earlier than they would have otherwise. It lines up with the precept of rewarding production. If a rep doesn’t produce commissionable sales they don’t get rewarded with compensation.
The second type of draw is a non-recoverable draw, meaning that a shortfall in commissions earned would not be charged against the rep. For example, if a rep was paid $2,000 in draw and only earned $1,500 in commission the $500 shortfall would be wiped away and they would start the next month with a clean slate. The only time I recommend this type of arrangement is when you need to guarantee a new rep a certain income level for the first 90 days or so. By giving them a non-recoverable draw you are able to leave your standard comp plan in place and get them focused on commissions early in their tenure while still meeting their initial income needs as they ramp up their sales performance. This is a much better option than guaranteeing reps a high salary when they start because there is still a production-reward system in place.
The next component of the sales comp plan is commission. This needs to be the driving force of your comp plan. Sales reps should earn the bulk of their income from commissions on closed sales. Commissions are typically based on either gross profit or sales revenue. Each has its pros and cons. Plans based on gross profit ensure that the sales rep doesn’t earn significant money unless he or she creates significant profit. The drawback to this plan is that the rep can sell a couple of machines for a lot of profit and earn a good living while not really building the long term future of the dealership through ongoing service revenue. Plans based on sales revenue reward reps for selling larger systems and/or multiple systems that lead to increased service revenue.
The drawback to these plans is that the equipment sales tend to be less profitable over the long run. Adjustable commission plans also work very well. These plans provide the opportunity for reps to earn higher commission percentages for sales to new customers or for achieving sales milestones. This can help balance the pros and cons of the two different commission plans. Because sales to new customers bring in new service revenue many dealers choose to pay as much as 5-10% more commission on these deals. A gross profit based commission plan can pay higher commission percentages as the rep reaches and exceeds sales revenue targets. For example a rep who sells $30,000 in revenue could earn 30% of the gross profit while a rep who sells $50,000 would earn 35% of the gross profit. This provides the incentive to keep gross profit high while driving for higher sales revenue in effect working both sides of the equation.
We also need to consider the trend of selling subscription-based plans like managed services. In these models the initial revenue from a sale is much smaller than many sales reps are used to. As such it is harder for them to get excited about a sale since it won’t result in a big upfront commission. In these situations you are usually best served by sharing a percentage of the revenue for a period of time (maybe even the life of the agreement). However, to get reps engaged you will need to help them understand the value of the annuity and its benefit above and beyond a larger one-time commission.
The final component of a well-structured sales comp plan is a quarterly bonus. When a sales rep is paid a salary, draw and commission you can still get tremendous peaks and valleys in their sales performance. For some reason it is quite common in this industry for reps to have a great month followed by a poor month. Having a quarterly bonus program that is based on total revenue or total units sold can bring a longer-term focus to your sales efforts. Reps that have a good month are encouraged to keep it going to earn the quarterly bonus, while reps that had a poor month can make up some of the lost income by reaching a quarterly bonus. These bonuses can be either flat dollar amounts, like $2,000 for achieving quarterly quota or additional percentages of sales commissions. Quarterly bonuses can also help retain strong sales reps. Usually these bonuses are paid 45 days after the end of the quarter and reps must be employed at the time of payment to get the bonus. I’ve seen this stop many a rep from leaving a dealership until the bonus is paid and very often they are now 45 days into another strong quarter and decide not to leave.
Making changes to your compensation plan should not be done without proper planning. There are few things that can kill a sales team as quickly as a comp plan change. Understand that any change will be met with skepticism. Prior to launching a comp plan change you need to do a few things. First, go back and run the new comp plan against the actual sales figures for the last six months to a year for each rep. Though this will take some time it will give you tremendous insight into what effect the change will have and is well worth the effort. Very often this leads to further tweaking of the plan. Once you’ve done this and come up with the new plan you need to recruit support from some of the sales team. Ideally you would bounce the plan off a rep or two to get their feedback. You want to choose reps that can be trusted to keep things quiet until you’re ready to launch the plan. They can give you valuable insight from the rep’s viewpoint. Additional tweaking might be needed at this point. When you are ready to launch the plan these reps can also be your advocate with the rest of the team helping to make sure the new plan is understood and accepted.
Having a strong comp plan can be the driving force behind building your dealership. It will help you attract and retain strong sales reps and will drive them in the direction you want them to go. Take a few minutes to look at your sales comp plans and see if they truly provide the incentive and drive needed to spark on your sales team. If the answer is yes don’t change a thing. If the answer is no consider the above points and start building a comp plan that will bring you the growth and profitability you desire.
Jim Kahrs is the president and founder of Prosperity Plus. Tel: 631.382.7762 firstname.lastname@example.org